Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2013] WASCA 36

How far can you push a commercial advantage under a contract before you fall foul of the doctrine of economic duress? This was one of the issues before the Western Australian Court of Appeal in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd.

The facts

Woodside Energy (Woodside) and Electricity Generation Corporation (Verve) were parties to a Gas Sale Agreement (GSA) under which Woodside:

  • was required to supply with gas up to a maximum daily quantity, and
  • "use reasonable endeavours to make available" an additional amount of gas up to a supplemental maximum daily quantity (the additional gas).

Due to an explosion at a gas production facility owned by Apache (the other main supplier of gas in the market), available supply dropped and the market price spiked.

Woodside informed Verve that it would no longer supply Verve with the additional gas under the GSA but would supply an equivalent quantity of gas under short-term gas sale agreements at a much higher price.

Verve argued that:

  • Woodside had not used reasonable endeavours to make the additional gas available, and
  • it was forced to enter the short-term gas sale agreements under economic duress.

Reasonable endeavours

The GSA required Woodside to "use reasonable endeavours to make available" the additional gas. However, Woodside argued that the separate condition in the GSA stating that, "[i]n determining whether [Woodside is] able to supply SMDQ on a day, [Woodside] may take into account all relevant commercial, economic and operation matters".

Woodside argued that the words "all relevant commercial, economic and operation matters" qualified the word "able" in the reasonable endeavours obligation, which meant that it had not breached its obligation by refusing to supply the additional gas in circumstances where it was more profitable to sell the gas under short-term gas sale agreements.

The Court held that the word "able" referred to Woodside's capacity to supply the additional gas, and the increase in the market price of gas did not alter Woodside's reasonable endeavours obligations.

Economic duress

Verve argued that the short-term gas sale agreements were voidable under the doctrine of economic duress. The doctrine of economic duress applies where illegitimate pressure has been applied to a party that has induced the party to enter into a contract, resulting in the contract being voidable.

The Court held that despite Woodside's genuine belief that it was not in breach of the GSA, its refusal to supply the additional gas left Verve with no option but to accept the short-term gas sale agreements. Essentially, Woodside had "applied" pressure on Verve.

The Court held that this was illegitimate pressure that was a cause of Verve entering the short-term gas sale agreements in circumstances that constituted a breach of the GSA.

Fatally for Verve's unjust enrichment claim for economic duress, Verve had not taken the next step of rescinding the short-term gas sale agreements, rendering them void. Accordingly, Verve was limited to seeking damages for breach of the GSA, which was subject to a liability cap.

Implications for agencies

This case highlights some of the risks associated with attempting to take advantage of a strong bargaining position when you already have contractual arrangements with a party. Economic duress is another factor that must be considered, along with good faith, when negotiating variations to your contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.